The Ultimate Guide to Buying Music Royalties TABLE OF CONTENTS
What is Royalty Exchange?
Introduction...... 03
Part One: Royalties and the State of the Music Industry
Chapter 01: Why Music Royalties?...... 05
Part Two: How Intellectual Property Generates Royalties
Chapter 02: Copyrights and Royalty Streams...... 14
Chapter 03: How Are Royalties Collected?...... 22
Part Three: Buying and Owning Royalties
Chapter 04: How to Value Royalty Streams...... 28
Chapter 05: Conducting Due Diligence...... 35
Part Four: How Royalty Exchange Changed an Illiquid Market
Chapter 06: Why Artists Sell Royalties...... 43
Chapter 07: Recent Auctions on Royalty Exchange...... 48
Chapter 08: Why Buy Royalties on Royalty Exchange?...... 53
1 What Is Royalty Exchange?
Royalty Exchange is the leading online platform for buying and selling royalties.
We offer a centralized, open marketplace to conduct royalty auctions, bringing transparency to an historically private process. The result maximizes value for royalty owners and provides a standardized and secure alternative investment opportunity for buyers and investors.
Originally founded in 2011 and privately held, Royalty Exchange is based in Denver, CO.
What Investors Are Saying About Buying and Owning Royalties
“I’m more of an active investor. I bid on music assets with the copyrights which allow me to help grow the royalty stream.” - Steven McClintock
“I watched things for a month or so to make sure I understood how it worked. Now I’m confident I’ve found great diversification and steady cash flow income for my portfolio.” - Curtis Johnson
“One of the smartest investments I’ve ever made. Now, the checks just show up and I get a good return without the work of most other investments.” - Ida Varshasky
“This is the next big thing, and you’re going to see it explode, with these guys leading the charge.” -Jonathan Hoenig, hedge fund manager
2 Introduction
Intellectual property assets with a strong track record of consistent royalty earnings may be a perfect investment opportunity.
What are royalty earnings? They are payments made to the owner of intellectual property every time third parties use or license the asset. IP owners collect royalties over and over again for an asset that someone created one time.
Here’s an example.
Take a minute and imagine that you write songs for a living. Some of these songs appear in comedy films, watched by movie goers all around the world. Over time, these films become classics, regularly watched on basic cable and channels like HBO and Showtime.
Imagine that one of the movies – still airing more than 20 years after its theatrical release – plays on television several times each month. Fans also watch these films on streaming services like Netflix and Hulu. They buy digital copies on iTunes or Amazon Prime. Or they purchase DVDs. Each time these films are viewed or bought, the owner of the royalties for these songs gets paid.
Now, you can stop imagining. As it turns out, this is a real story. It’s what happened to songwriter Billy Goodrum. His original music appeared in the Jim Carrey hit comedy “Dumb and Dumber” (1994), and he also wrote songs for other popular films like “Shallow Hal” and “There’s Something About Mary.”
Collectively, he’s earned $22,000 annually, and his music has generated income every year since it first appeared on the silver screen. Even better – the income streams tied to these assets increased at a 15% rate each year from 2011 to 2015.
Now, if you’re not an artist or songwriter, you probably haven’t enjoyed the benefits of intellectual property investment. But it’s something that you should seriously consider.
Think about what would make a perfect investment:
● Could it offer strong yields? ● Could it offer the upside of value appreciation? ● Could it reduce your risk and exposure to volatile equity markets? ● Could it offer long-term returns, possibly decades after you buy it?
3 If you’re interested in all four qualities, you can find them in music royalties.
And here’s the cherry on top: This is one of the most fun and unique investments on the planet. Just think about turning on Pandora or Spotify and hearing “your song.” Since you own the intellectual property, you’re getting paid royalties from different third parties. A small smile may form because this song pays you money each time you hear it.
And when you own intellectual property, it’s yours - profit, rights, and all.
As we explain in this guide, some major trends are emerging that will make the music and entertainment industries very attractive marketplaces for intellectual property owners in the years ahead.
At Royalty Exchange, we aim to boost awareness and provide education on how royalties work and why they make a great investment.
We operate in an open marketplace with established standards and quantifiable results. And we’re excited to build a robust platform that unites artists and investors.
That’s why we created The Ultimate Guide to Buying Music Royalties. This guide offers you a deep dive into the world of intellectual property ownership in the music industry – insight you won’t find anywhere else. You’ll learn the opportunities, risks, terminology and major players in the royalty space. You’ll learn how music copyrights offer unique returns for investors. You’ll learn common ways that investors value this alternative asset.
Best of all, we’ll show you how and where to tap into the billions in new royalty revenues awaiting investors in the next five years.1
Let’s get started.
1. Statista via PWC http://www.statista.com/statistics/259980/music-industry-revenue-in-the-us/
4 Part One – Royalties and the State of the Music Industry
Part One: Royalties and the State of the Music Industry CHAPTER 01 Why Music Royalties?
The Ultimate Guide to Buying Music Royalties 5 Part One – Royalties and the State of the Music Industry
Music royalties are unique because they are considered “alternative assets.” They are much different than traditional stocks, bonds, and cash investments. They are also less frequently tracked by retail or institutional investors.
They don’t receive much attention from CNBC, the Wall Street Journal, or the mainstream financial media. You can’t track their performance on Bloomberg Terminals or TD Ameritrade.
But that doesn’t mean that the industry hasn’t seen an increase from new interested buyers, including alternative investment managers in the private equity and hedge fund industries, high-net-worth individuals, and accredited investors.
What you might not know is that intellectual property – sometimes called “Intangible Assets” – are the most valuable asset class in the world today. The value of all combined intellectual property in the United States today is worth at least $5.8 trillion, according to the U.S. Chamber of Commerce.2
That is more than the nominal GDP of any other nation.
However, knowing how to exploit these assets remains one of the biggest challenges for investors and businesses without proper guidance or understanding how they generate income. Returns on investment for this alternative asset class are best defined as royalties paid directly to the owners of intellectual property.
Royalties work like this: The owner of a royalty has the right to license the asset – in the case of music, a song or portfolio of songs – to third parties. These third parties then have to pay the royalty owner any time they use it.
In the music business, there are various organizations in charge of collecting royalties who obtain payments from these parties, and distribute them at specific time periods to the intellectual property owners. Royalties can be paid annually, quarterly, or on a monthly basis.
Royalties Offer Direct Access to Industry Revenues
For a long time, few investors were able to get in on the income generated in this industry. There isn’t a New York Stock Exchange for royalties. If someone wanted to buy these assets, they typically needed to take part in backroom deals between insiders and artists.
2 http://www.theglobalipcenter.com/resources/why-is-ip-important/
The Ultimate Guide to Buying Music Royalties 6 Part One – Royalties and the State of the Music Industry
The only way to profit from the music business outside of this is owning stock in a firm like Sony – the parent of the Sony Music Entertainment – or a rival company that owns and operates a music production division. Unfortunately, these global entertainment giants don’t provide clear access to music industry revenues. They have many different subsidiaries, products, and services that impact the company’s bottom line and stock performance.
That’s what make music royalties such a unique investment. Music royalties offer direct exposure to revenue streams generated by music consumption.
In 2013, the International Confederation of Societies of Authors and Composers (CISAC) collected more than $8.8 billion in royalties on behalf of artists and musicians around the globe, according to to the organization’s 2015 Global Collections Report.3
Royalties Are Not Rare Assets
When you own rights or a percentage of a royalty stream tied to a song or catalog of songs, you collect revenue every time they are streamed, played, downloaded, or covered. When a song you own the rights to plays on Spotify, you receive a royalty. When someone downloads that song on Apple Music, the tech giant pays a royalty to you – the owner.
But royalty payments for intellectual property owners are not unique to the music industry. Royalty streams exist in the energy sector, as payments to the rights to oil, gas, and solar energy production. They’re common in the healthcare industry on patents and medical devices. They’re paid to authors and filmmakers when someone buys a book or watches a film on Netflix. Screenwriters receive royalty payments from the Writers Guild of America when someone uses, buys, or downloads their scripts.
This income recurs in high-demand industries with hundreds of millions of customers, if not more. A common theme among these industries is that compensation is paid for the use of another person’s intellectual property.
Understanding Intellectual Property
Intellectual property (IP) refers to creations of the human mind. These assets include underlying rights to inventions; literary and artistic works; computer designs; and trade symbols used in global commerce.
Intellectual property also includes copyrights (also known as an author’s right). ”Copyright” is a legal term that describes specific rights held by artists and other creative types over their works. Copyrights span a broad base of different creative 3 http://www.billboard.com/articles/business/6465777/cisac-2015-global-collections-report-royalties-remain-stable-at-88-billion
The Ultimate Guide to Buying Music Royalties 7 Part One – Royalties and the State of the Music Industry works, including music, literature, artwork, sculpture, and film. They also cover technical drawings, computer programming, personal databases, advertising works, maps, and other business concepts.
In the following chapters, we describe the specific types of copyrights tied to the music industry and how other parties compensate asset owners for use of their IP.
U.S. copyright laws mandate compensation for such use. Copyright laws also ensure that no one can steal another person’s intellectual property. No one can copy intellectual property (without explicit permission). And no one can sell someone else’s intellectual property without serious legal consequences.
Simply put: If they want to use your intellectual property, they must buy it from you or pay you compensation every time they use it.
Within the music industry, copyrights are the basis on which royalty payments are made. And when you own popular intellectual property rights, it can provide several key benefits that are attractive to investors.
The Key Benefits of Owning Intellectual Property
1. Music Royalties Can Provide Strong Income Streams
Music royalties can provide strong income over the duration of the music copyright. This quality is important to investors in times when they are unable to generate much from low-yield savings or bonds investments.
Music royalties are also not impacted by global central banks that subject investors and regular citizens to negative interest rates.
Royalties are subject to the global demand of music fans and businesses that use music for personal and professional purpose. A federal statutory standard ensures that royalty rates are set for IP holders. This framework is critical to ensuring that IP owners receive their royalties at a standard rate for each use.
Depending on how IP owners are paid (a topic of discussion in Chapter 4), royalty payments are typically received on a quarterly or monthly basis.
These payments depend on the number of times that third parties use the intellectual property in previous periods. Naturally, that can create some large spikes in revenue or smaller lump payments depending on demand.
The Ultimate Guide to Buying Music Royalties 8 Part One – Royalties and the State of the Music Industry
2. Potential Appreciation and Value Upside
In addition to long-term income, the value of intellectual property can rise over time.
You might remember what happened after the passing of Michael Jackson. His net worth surged after his death in 2009. Billboard writes that MJ Inc., the firm that controls his branding, earned at least $1 billion since his passing.4
Roughly half if it – $494 million – is tied directly to music sales and royalties. In fact, his royalties have increased by 70% since his passing.
There are other ways that music royalties can appreciate in value. Intellectual property in music typically increases in value when there is an increased demand from others to use, license, or reproduce it over time.
Based on its popularity, the mood the song sets, or the message it conveys, a song or portfolio of songs can generate a lot of demand. Sometimes movies and commercials will use the same song time and time again. Increased use boosts the number of payments that the intellectual property holder receives.
A strong example of music that can increase in value are assets known as “evergreen” songs. These songs are typically always in style. They set a mood and provide listeners with a unique feeling each time they hear it. These songs are immensely popular with advertisers and film producers due to their ability to fit into the narrative of a story or message they are trying to convey.
When more companies and individuals pay to license these songs, the value of these assets typically increase.
For example, Royalty Exchange recently sold the royalty income and master recording copyright for the song “Love.” Not only is it popular with consumers, but companies and advertising agencies also regularly request to license this song in commercials for various products. Firms have paid licensing fees for this song to appear in different movies, including “She’s the Man,” “Something’s Gotta Give,” “Wedding Crashers,” “Hotel for Dogs,” and more.
Here are a few examples:
● Nissan used it in commercials promoting the Nissan Leaf vehicle in 2014. They paid $200,000 to use the song in their regional dealership ads.
● Panasonic used it in 2012 to promote their brand. They paid $175,000 to use the song.
4 http://www.billboard.com/biz/articles/news/retail/1177325/michael-jackson-two-years-since-his-death-how-much-has-he-sold
The Ultimate Guide to Buying Music Royalties 9 Part One – Royalties and the State of the Music Industry
● Microsoft used the song to promote Bing in France, Germany, Spain and Puerto Rico. They paid $125,000 to use the song.
● Aveeno used the song to promote its Baby Moisture Lotion product. Wow Mom used the song in its Mother’s Day 2014 advertising campaign.
● Cadillac used the song in an advertisement for its new navigation system in 2011. They paid $50,000 to feature the song on the navigation screen in the commercial.
● Sandals used the song in 2010/2011 to promote their resorts. They paid $60,000 for the sync license.
3. Longevity of Individual Copyrights
Royalties also provide another key benefit: The continuation of their income streams can be significant depending on the length of the copyright protection.
Some copyrights will outlive many of the companies trading on the stock market today. Depending on the origin of the musical work, a copyright could last up to 70 years after the death of the artist, songwriter, or musician.
That means that intellectual property is an asset that can be owned for decades, providing returns based on the demand for its use long after its creation and passing of its creators.
One of the risks and benefits of music intellectual property is that a song’s popularity can go in cycles.
We’ve seen a large shift in popularity of music over the last decade. In 2015, for the first time, newly released music was outsold by catalog albums, which consist of music released more than 18 months ago. According to Nielsen, catalog albums sold over 4.3 million copies more than their newer counterparts. While this doesn’t include streaming services, it is a significant trend that has increased over the last decade.5
In 2005, current music sales outsold catalog music by more than 150 million albums. Music listeners can now control their experience between buying individual songs or a customized streaming experience. The flip of buying behavior suggests that older music can remain or become increasing popular long after its release and still generate income for its IP owners.
Some songs can go through many different cycles over time, renewing income streams. After it fades from the radio, a song can find new life as a classic song or throwback tune to the soundtrack of a film or television show.
5 http://www.chartattack.com/news/2016/01/20/old-music-is-outselling-new-music-for-the-first-time-in-history/
The Ultimate Guide to Buying Music Royalties 10 Part One – Royalties and the State of the Music Industry
For example, “Handbags and Gladrags” was a song written in 1967 by Mike d’Abo, the then-lead singer of the band Manfred Mann. The song peaked at #33 in the United Kingdom that year. It would generate little interest even though Rod Stewart covered the song in 1969. The song didn’t find too much mainstream success, even though it was re-released as a single in 1972. At its U.S. peak, it hit #42 on the Billboard Hot 100.6
Twenty years would go by before the song suddenly found renewed interest. In 1993, Stewart recorded a live version of Handbags and Gladrags during his MTV Unplugged session. The song generated income through sales of the Unplugged album. Then, it faded again from the public. But years later, something important would happen for the song and its IP owners
The United Kingdom saw the remarkable rise of a television show called The Office. It starred comedian Ricky Gervais, and the producers chose this song as its theme. The version is performed by singer Big George.
The Office was a smash hit. Its rights have been sold to broadcasters in more than 80 nations. It has appeared on channels like BBC Prime, BBC America, BBC Canada, ABC1 in Australia, The Comedy Network in Canada, and TVNZ in New Zealand. It even appeared on Cartoon Network September 2009 until 2012.7 And each time that The Office airs, the owner of the IP tied to this song receives a royalty payment.
This series of events offers evidence of how a forgotten song can experience multiple revivals and generate income for the owners of the intellectual property over many years.
4. Diversification
Diversification from the stock market is one of the benefits of music royalty investment. Given that they are largely uncorrelated to the market, they can reduce volatility and even provide greater returns for an investor.
Traditionally, many investors have considered gold, oil, and other commodities to be a hedge against market volatility. But this has proven to be false in recent years.
In a 2011 article by Charles Sizemore, the portfolio manager explains that investments in commodities like gold, oil, and real estate do not provide the type of diversification that they used to offer. The author cites an academic study from Princeton University that shows that such commodities have become more correlated with other asset classes like stocks and bonds.8
6 https://en.wikipedia.org/wiki/Handbags_and_Gladrags 7 https://en.wikipedia.org/wiki/The_Office_(UK_TV_series) 8 http://investorplace.com/2011/07/commodity-stocks-sp-500-indexrth/#.V7SnyWWzhuZ
The Ultimate Guide to Buying Music Royalties 11 Part One – Royalties and the State of the Music Industry
Now, let’s return to our earlier example of royalties sold on Royalty Exchange. The royalty streams tied to the music used in films like “Dumb and Dumber” generated $22,627 – an initial yield of 18.4% – from the use of songs over 12 months. The use of – and demand for – the songs generated this revenue. This is a key distinction.
It wasn’t stock prices, interest rates, or the Federal Reserve’s monetary policy that allowed the owner to earn more than $22,000 in royalty payments. The songs determined the annual return on investment. They will also determine the future revenues produced by these intellectual property assets.
Keep in mind, periods of volatility are also times when alternative investments like royalties grow more popular. Consumers don’t stop listening to music if the S&P 500 rises or falls.
That doesn’t mean that music is recession proof. During the 2008-2009 financial crisis, the global economy sank and financial problems rippled to every corner of the globe. Every major industry in the world faced financial downturns.
But music’s challenges and risks – which we outline in the next chapter – are more affected by individual industry trends than broader macroeconomic concerns.
The Ultimate Guide to Buying Music Royalties 12 Part One – Royalties and the State of the Music Industry
Chapter 1: Key Takeaways
● Music Royalties are an alternative asset that generate returns based on the use of intellectual property.
● Intellectual property is the most valuable component of the U.S. economy and it is growing worldwide.
● Music royalties can provide strong income and appreciation upside over a long time horizon.
● These alternative assets are less exposed to market downturns than traditional stocks and bonds and provide diversification from market volatility.
The Ultimate Guide to Buying Music Royalties 13 Part Two – How Intellectual Property Generates Royalties
Part Two: How Intellectual Property Generates Royalties CHAPTER 02 Copyrights and Royalty Streams
The Ultimate Guide to Buying Music Royalties 14 Part Two – How Intellectual Property Generates Royalties
Copyright laws are the backbone of the music industry. Without these statutes, intellectual property would have little value – if any.
In the music industry, copyright rules shape most of the agreements that generate recording deals between musicians, labels, publishers, and other third parties. They ensure that intellectual property holders are fairly compensated for use of their assets.
The United States has some of the most advanced copyright laws in the world. Over the last 100 years, Congress has amended legislation to benefit the protection of intellectual property and to ensure fair compensation for its use by third parties.
Music copyrights originate at the moment they are “fixed.” This means that a song has been composed on paper, recorded, or digitally saved. This standard is necessary since it allows musicians to argue they originated the assets even if they failed to register with the U.S. Copyright office.
How Long Does the Copyright Extend?
Each royalty stream varies according to the duration of the music copyright. As an investor interested in acquiring royalties, it is important to determine the value of your return by how many years you can expect payment based on your ownership rights.
Some royalty streams can be short: Perhaps a five- to 10-year time frame. Others can be much longer. It all depends on the time when the music was composed and filed.
Copyright law ensures significant protections to the holders of the music copyright. When a copyright expires, it becomes “public domain.” This term means that anyone can reproduce it and sell the music for personal financial gain without having to pay royalties to an IP holder.
For example, during every Major League Baseball game, stadiums play the song “Take Me Out to the Ball Game” during the seventh inning.
The song was written by Albert Von Tilzer with the assistance of Jack Norworth. Now, if this song were protected under copyright -- and had been written in (let’s say) 1990 -- baseball stadiums would have to pay royalties every time that fans sing this song. Also, film producers would pay royalties if the song appeared in movies. Any artists who want to reproduce their own version would also need to pay royalties.
The Ultimate Guide to Buying Music Royalties 15 Part Two – How Intellectual Property Generates Royalties
But because this song was written in 1908, the song is in the Public Domain and no longer protected by copyright law.
The chart below breaks down the length of each copyright term depending on the original date of origination and the correlating terms protecting the asset.
Date of Work Protected From Copyright Term
Published before 1923 No longer protected. It is now None public domain
Published 1923 through When published with notice 28 years. It can then be renewed for an 1963 additional 67 years. If the rights holder does not renew, it becomes public domain.
Published 1964 through When published with notice 28 years for first term. It experiences an 1977 automatic extension of 67 years for its second term. Afterward, it will become public domain.
Created before 1978 but January 1, 1978 is the day that the Life of the musician + 70 years, or December never published 1976 Act which eliminated common 31, 2002 law copyrights
Created before 1-1-78 but January 1, 1978 is the day that the Life of the musician + 70 years, or December published between then and 1976 Act which eliminated common 31, 2002 12-31-2002 law copyrights
Created after January 1, When work is fixed in tangible Life of the musician + 70 years 1978 medium of expression
Source: U.S. Copyright Office, Round Hill Music
Returning to our example of “Take Me Out to the Ball Game,” anyone can use this song given its status as “Public Domain.” As the chart above indicates, all music released before 1923 holds this designation.
Music created today is protected by copyright laws when the work is “fixed in tangible medium of expression.” Any work produced after January 1, 1978 is protected for the lifetime of the composer plus an additional 70 years.
So, if an artist passed away on January 1, 2016, their music would be protected under copyright laws until January 2086. Any use or reproduction would require a royalty payment to the artist’s estate if it maintained control of its creative assets.
The Ultimate Guide to Buying Music Royalties 16 Part Two – How Intellectual Property Generates Royalties
Types of Music Copyrights
In music, a fundamental distinction exists between the types of copyrights issued by the U.S. government. Each song has two distinct copyrights attached to it: one for the Composition and another for the Recording. These are important distinctions that dictate how music may be used and who gets paid for these different uses.
The Composition refers to the song as it is written by the songwriter, including lyrics if applicable. The Recording is the actual performance of that song by musicians.
What this means is that songwriters receive publishing rights for their contribution, while musicians – the actual recording artists – receive the recording rights. Naturally, the songwriters and the recording artists can be the same people – meaning they receive both forms of copyrights and the accompanying royalties.
What Are Recording Rights and Publishing Rights?
Every piece of music has two different kinds of rights--Recording rights and Publishing rights. Recording Rights refer to the master recording captured on different formats (physical vinyl or CDs, and digital MP3s or streaming audio). Publishing refers to the underlying Composition from which that recording was made.
Who retains these rights depends on the types of deals musicians and songwriters make with different entities in the music business. For instance, if an artist is signed to a record label, the label typically holds the Master Recording rights and pays the artist a percentage of what those rights earn depending on their individual contracts. But some artists control their own Master Recordings as well.
Legally, the extensions of these musical rights are called “licenses.” Many different types of recording rights can be licensed to third parties, thus generating different types of Royalties.
Recording Rights Licenses
Recording Rights generate royalties from the Master Recording, and include licenses for such uses as:
Distribution
This refers to the rights to sell or otherwise transfer the sound recording across all formats, including physical (vinyl/CDs), and digital (downloads and streaming), as well as the means of that transmission (cable, Internet, phone lines, etc.).
The Ultimate Guide to Buying Music Royalties 17 Part Two – How Intellectual Property Generates Royalties
Broadcast & Public Performance
Also called “neighboring rights,” this refers to the right to play the Recording from a single source to multiple people, including:
● Internet radio platforms like Pandora.
● Satellite platforms like BBC Radio and Sirius XM.
● Cable Television music channels like MTV and VH1.
● International terrestrial radio (outside of the USA).
● In clubs and at live performances.
● At retail locations and businesses that play background music.
Synch Rights
Synchronization rights are tied to the reproduction of a song when it is used in television and film. But that’s not all – this includes video commercials, radio advertising, even when a song plays during a busy signal on a 1-800 number. The term synchronization means that the song is coordinated with advertisements, television, film, or another system in unison.
Other Rights
These can include the right to use the recording to manufacture CDs or other physical formats, store recordings in online databases, remix the recordings into derivative works, or sub-licensing activity.
Publishing Rights
These are the rights to the song Composition, including the individual notes to the song and the accompanying lyrics.
Publishing rights have similar benefits to Recording rights in that the owners can license their music to third parties. However, some distinct differences exist in the variety of Publishing rights.
The Ultimate Guide to Buying Music Royalties 18 Part Two – How Intellectual Property Generates Royalties
They include:
Mechanical Rights
These refer to the right to reproduce and commercially distribute copyrighted material in physical and digital format, similar to the Distribution rights of the Sound Recording (physical CDs, digital downloads, etc.). This includes when a music publisher has allowed permission for a song to be reproduced by a separate artist. We’ve seen many cases where popular artists cover little-known songs and make them popular.
Led Zeppelin’s hit “Dazed and Confused” is a cover of a song by Jake Holmes.
Popular 1980s hit “Tainted Love” by Soft Cell was a remake of a 1964 Gloria Jones song.
The Rolling Stones hit “Time Is On My Side” was a cover of an Irma Thomas song.
Cyndi Lauper’s “Girls Just Wanna Have Fun” was a remake of Robert Hazard’s song by the same name.
Joan Jett’s “I Love Rock N Roll” is a cover of the song originally written and performed by The Arrows.
In the U.S., the government sets mechanical rights through compulsory licenses. Today, the royalties pay roughly 9.1 cents for every dollar earned by the sale of these recordings. These royalties are traditionally paid directly to the publisher, who later distribute it to the other rights holders.
Internationally, rates and distribution differ by region, and there are multiple societies that exist to track and distribute those funds.
Broadcasting and Performance Rights
Songwriters also receive performance rights for the use of the composition (as opposed to the recording) but they are limited to certain media.
They include the use of songs on television and digital services like Pandora. However, songwriters also receive royalties whenever their music plays on terrestrial radio, whereas in the U.S. there is no royalty for the sound recording.
This qualification for radio royalties is a key distinction of copyright law.
The Ultimate Guide to Buying Music Royalties 19 Part Two – How Intellectual Property Generates Royalties
Copyright law sees the performance of songs on the radio as a form of YouTube Royalties promotion for future sales. Due to this consideration, owners of Master rights YouTube now accounts for 40% – the actual song recording – do not of all the music consumption. receive payments. But intellectual property Publication and Print Rights owners do not receive master These rights exist to produce, sell, or rights royalties (for the label license sheet music. or performing artist) unless an advertisement plays against the This form includes both physical video. That’s because YouTube copies in books and magazines. It generates the vast majority of also includes the transmission of its revenues from advertising. sheet music and lyrics from sites like Only a small part is now premium MusicNotes.com or Google Lyrics. membership in YouTube Red, which pays normal royalties Owners of print rights collect royalties to the composition and sound when music lyrics are used in books, recording. magazines, and on websites. They also include applications that help YouTube does pay publishing musicians play songs at home. rights owners (both publishers and songwriters) directly for the Synchronization Rights use of their intellectual property. The video company sends these Similar to the rights of Recording royalties directly to Performance Artists, owners of Publishing Rights Rights Organizations (PROs). receive similar royalty payments. Under these synchronization rights, Rightsholders can use a individuals pay to “synchronize” music technology called Content ID to and lyrics to advertisements, television claim their content and ensure it shows, and films. is broadcasted with permission. Content ID provides a digital Adaptation, Translation, fingerprint for every song that is Arrangement Rights. uploaded, streamed, or shared It is common for songwriters and on YouTube. Rightsholders can publishers to alter the song that use it to track when their IP is is played. Also, these rights allow used, and set their preferred individuals to take the song and conditions for use. This can translate it into different languages. range from monetizing the video through ads, to outright removal from the service.
The Ultimate Guide to Buying Music Royalties 20 Part Two – How Intellectual Property Generates Royalties
Chapter 2: Key Takeaways
● There are two types of copyrights in the music industry: Master Recording rights and Publishing rights.
● Musicians receive recording rights while songwriters receive publishing rights.
● Copyright laws protect individual intellectual property and endure for extended periods of time depending on their date of origin.
The Ultimate Guide to Buying Music Royalties 21 Part Two – How Intellectual Property Generates Royalties
CHAPTER 03 How Are Royalties Collected?
The Ultimate Guide to Buying Music Royalties 22 Part Two – How Intellectual Property Generates Royalties
In this chapter, we will examine how owners of intellectual property collect A Key Distinction various types of royalty payments for the use of these assets. Under the rules of the Department of Justice, BMI Performance Royalties and ASCAP operate under legal frameworks known as “consent Owners of publishing and songwriter decrees.” These decrees are performance rights typically rely on designed to promote competition the efforts of Performance Rights between these organizations to 9 Organizations (PROs). attract new licensees and recruit news songwriters and publishers These organizations are responsible to their ranks. for collecting Performance royalties. This is important because the PROs are In exchange for the right to not in charge of collecting mechanical collect on behalf of songwriters royalties, synchronization royalties, or across America, the PROs are (usually) digital performance royalties limited in their ability to negotiate tied to master recordings. We will cover by “rate courts,” which set that in a moment.10 royalty rates per radio play, stream, or download. Remember, public performance royalties are paid whenever a song is played Rate courts set specific rates for in public. This includes the playing of royalties paid by radio stations, a song on radio (AM/FM, streaming, concert halls, bars, nightclubs, or satellite), in a concert hall or in a sports stadiums, colleges and restaurant, and on television shows and universities, malls and shopping commercials. centers, and amusement parks.
After the PRO collects royalties, they distribute them to the rights holders. Songwriters and publishers are encouraged to join a PRO and register songs and their locations to ensure prompt payment of their royalties.
The four main collection agencies in the United States:
● ASCAP (American Society of Composers, Authors, and Publishers) ● BMI (Broadcast Music, Inc.) ● SESAC (Society of European Stage Authors and Composers) ● SoundExchange
9 http://diymusician.cdbaby.com/musician-tips/what-is-a-performing-rights-organization/ 10 http://diymusician.cdbaby.com/musician-tips/what-is-a-performing-rights-organization/
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1. ASCAP (The American Society of Composers, Authors, and Publishers)
This PRO has more than 500,000 members, including composers, songwriters, lyricists, and music publishers. The PRO prides itself on being controlled by its own members, as the 500,000 participants directly elect its Board of Directors.
Notable artists in ASCAP include Beyoncé, Justin Timberlake, Vampire Weekend, Duke Ellington, Dave Matthews, George Gershwin, Stevie Wonder, and Marc Anthony.
To join, members pay a one-time fee of $50.
Founded in 1914, ASCAP has offices in New York, London, Miami, Puerto Rico, Los Angeles, Nashville, Atlanta.
Official website: ASCAP.com
Twitter: @ASCAP
ASCAP pays owed royalties on a quarterly basis.
2. BMI (Broadcast Music, Inc.)
BMI has more than 650,000 members and bills itself as a “bridge” between songwriters and businesses that play music in public. The group represents at least 8.5 million member-owned works.
Notable members include Mariah Carey, Lady Gaga, Taylor Swift, Eminem, Rihanna, Maroon 5, Sam Cooke, Willie Nelson, and Dolly Parton.
Songwriters can join BMI for free. Publishers pay a one-time fee of $150.
Founded in 1939, BMI has locations in Nashville, New York, Los Angeles, London, Atlanta, Miami, and Puerto Rico.
Official website: BMI.com
Twitter: @BMI
BMI Live distributions are paid on a quarterly basis.
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3. SESAC
SESAC is the only PRO that is invitation-only.
This PRO represents about 30,000 songwriters and has 400,000 songs under its watch. They bill themselves as “the fastest growing and most technologically adept of the nation’s performing rights companies.”
Notable members include Bob Dylan, Neil Diamond, Rush, MGMT, and Mumford and Sons.
Founded in 1930, SESAC has offices in New York, Los Angeles, Atlanta, Miami, London, Nashville.
Official website: SESAC.com
Twitter: @SESAC
SESAC pays its royalty streams on a quarterly basis.
4. SoundExchange
SoundExchange is a PRO that exclusively collects digital public performances royalties.
They collect royalties under standards set by two different sets of regulation. First is the Digital Performance Right in Sound Recording Act of 1995, and second is the Digital Millennium Copyright Act of 1998.11
SoundExchange collects royalties from music service providers for the right to play a song on a digital platform for non-interactive streaming use. Non- interactive refers to music streamed based on programming or algorithms outside of the listener’s control, as opposed to on-demand streaming where the listener select the specific song to play.
Royalties are paid out as follows: 50% goes to the record label, 45% goes to the featured artist, and 5% goes to non-featured artists like background vocalists, session musicians, and others who took part in the recording.
11 https://bandzoogle.com/blog/music-licensing-101-what-is-a-performing-rights-organization
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Mechanical Royalties
Mechanical royalties are paid to songwriters whenever a song they’ve written is reproduced on vinyl, tape, CD, MP3, etc.
These licenses can be obtained through the Harry Fox Agency (HFA).
Founded in 1927, HFA manages, collects, and distributes mechanical licenses on behalf of more than 48,000 music publishing clients. The agency collects mechanical royalties and pursues claims involving piracy of a client’s intellectual property.
Mechanical royalties are set by Federal statute.
Currently, the mechanical royalty rate for physical recordings and permanent digital downloads is 9.1 cents for songs of five minutes or less in length. Licensees pay 1.75 cents per minute (or fraction of this amount) for songs exceeding five minutes.
Synchronization Royalties
Songwriters and publishers are responsible for the collection of synchronization licenses and royalties if they are the ones who provided permission for someone else to use their music in film, television programs, commercials, or other audiovisual work.12
Print Music Royalties
This final category of royalties is collected by songwriters and/or music publishers. The individuals that granted print music licenses should collect them from companies engaged in the printing and dissemination of sheet music, lyrics, or other similar assets. 13
International Representation
Outside of the U.S., foreign musicians collect royalties from domestic societies representing musicians in their home nation. Foreign, government-owned PROs are in charge of collecting performance royalties in these domiciles. To ensure that owners receive their payments, these PROs encourage songwriters and publishers to enter into a “sub-publishing” agreement.
12 http://law.freeadvice.com/intellectual_property/music_law/collection_royalties.htm 13 http://law.freeadvice.com/intellectual_property/music_law/collection_royalties.htm
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Under these agreements, the IP owners can register their music and current locations. They also will designate an agent to contact individuals and businesses that use this intellectual property and issue performance licenses.
A few notable examples of foreign PROS include:
● Canada: SOCAN, CMRRA,
● France: SACEM
● United Kingdom: PRS for Music, and MCPS
● Denmark: KODA
● Australia: APRA/AMCOS
● Sweden: STIM
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Part Three: Buying and Owning Royalties
CHAPTER 04 How to Value Royalty Streams
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Whether you are buying stocks, real estate or music assets, it’s critical to remember that you are purchasing the future value of income.
A classic example of when investors forgot this lesson happened not long ago. Back in 2000, the Nasdaq traded at nosebleed levels. The Price-to-Earnings ratio of the Nasdaq sat at 175, according to data from Nasdaq and Bloomberg.14
This massive valuation level means that investors would have to wait 175 years to recover an initial investment tied to the average company listed on the index. And that is without setting a discount rate or factoring the time value of money.
That was at the height of the Dot-Com Bubble. Sixteen years later, the Nasdaq’s P/E ratio sits at 32. That’s still a bit high, but it’s far more rational than the events of the early 2000s.
Properly valuing royalties may be more important than valuing stocks, bonds, mutual funds, or ETFs. That’s because royalty investments are considered illiquid assets.
This means investors can’t buy or sell intellectual property on a daily basis like traditional investments. When considering a purchase in IP, investors should plan on holding them in perpetuity.
When buying these assets, investors want to ensure they obtain a fair price. Paying too much runs the risk either of not making the money back or earning poor long-term returns compared to other investment opportunities.
Also, investors need to consider that royalty streams are variable.
In one quarter, royalty payments may be higher than the average quarterly payouts. In the following quarter, they may fall below the historical average. When considering a deal, start by understanding individual risk tolerance.
Are you a conservative investor who is only willing to pay a lower multiple for an asset? Or are you willing to be aggressive and pay more in the hopes that this asset will appreciate in value or increase royalty payouts over time?
This decision will help you reach personal exceptions for future earnings.
14http://money.cnn.com/2015/03/10/investing/nasdaq-5000-stocks-market/
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Selecting a Valuation Method
It’s possible to apply simpler valuation methods for intellectual property in the music space than the methods used for other types of investments.
While these methods are not as advanced as statistical decision trees or Black- Sholes models, investors can incorporate different techniques to improve forecasting expectations.
The two most popular approaches to value for intellectual property in the music sector are:
● The Income Approach: Value assets based on revenues recorded through use over time.
● The Market Approach: Assess the sale of similar assets in previous market conditions.
First, Let’s Discuss the Income Approach
The value of intellectual property is best defined by its ability to generate income in the future. An income-based method calculates the future royalty expectations to determine a present value by using “the time value of money.”
Several different income methods exist that investors can use when assessing the value of royalty streams. The most common is the discounted cash flow (DCF) method.
Discounted Cash Flow (DCF) Method
This method determines the value of intellectual property by examining the present value of expected cash flows in the future. Investors want to evaluate the expected cash flows in future years and then use an appropriate discount rate to determine present value.
Investors must understand the “Time Value of Money” (TVM) and their expected risk when projecting growth or decay of annual royalty streams. As a reminder, TVM is the concept that capital available today – in the present – is worth more than the same amount of money at a future date due to the possible earning capacity.
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When using the income approach, the goal is to determine three important measurements for the associated royalty asset.
● The projected future revenue stream
● The payback period and lifecycle
● The risks associated with this asset’s ability to generate revenue
Royalty owners can explore the data from PROs to determine past income payments. The payback period is defined by the amount of time it will take to recoup the initial investment using the Time Value of Money. This guide breaks down additional factors in Chapter 5 to determine the risks associated with the asset.
How to Use the Income Approach
Income generation is the most reliable data point used to value the current net present value of a royalty stream and its future revenue potential.
Let’s consider a hypothetical. Say that a copyright has 10 years left before it becomes public domain.
This royalty stream is expected to provide $10,000 in the first of these 10 years. One might project that these royalties will decline by 5% annually over the duration of the copyright based on the risk factors at play.
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We can determine, based on that 5% annual decline, how much money this royalty stream may generate over the next decade. In the example below, the royalty stream is expected to make roughly $80,252 over 10 years.
A B
1 Year Expected Royalties
2 1 $10,000.00
3 2 $9,500.00
4 3 $9,025.00
5 4 $8,573.75
6 5 $8,145.06
7 6 $7,737.81
8 7 $7,350.92
9 8 $6,983.37
10 9 $6,634.20
11 10 $6,302.49
Total $80,262.61
But that is not the Present Value of this expected income, which can be determined through simple calculations in Microsoft Excel.
Using an empty frame in Excel, Type “=NPV”
At this point, a prompt will ask you for two different types of data.
● “Rate” represents your assigned discount rate. Let’s enter “0.1” or 10%.
● “Value” represents the total royalties expected for a particular year.
Since we want to obtain the Net Present Value of all 10 years, we will highlight all of these figures.
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If we assume a discount rate of 10% each year, we can find that the present value of our expected cash flows is $51,277.40. This would be our value of the intellectual property.
The income approach provides a simple way to project the value of future cash flows. The information required to complete this valuation is typically available during the auction process.
The Market Approach
Music royalties are not liquid assets. They are not commonly traded. There is no financial exchange that allows you to buy and sell them each day.
With the market approach, we want to compare the assets to other assets that have sold on the market to set a valuation.
Two primary steps exist in this valuation method:
1) The screening process 2) The adjustment process
The screening process involves seeking information on comparative attributes. You can look at historical transactions to find similar assets, the value of their royalty streams, and their sales price.
These transactions give us a baseline to compare what has happened in the past to today’s marketplace. Once we have found similar assets with similar attributes, it is time to compare the conditions of the marketplace over time.
The adjustment process – a process of due diligence – centers on our ability to understand more about the assets and the environments in which they perform. That due diligence process helps us “adjust” our expectations of this asset compared to the performance and attributes of others.
In the next chapter, we will discuss that due diligence process.
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Chapter 4: Key Takeaways
● There are two primary methods to value royalty streams, the Income Approach and the Market Approach.
● The best Income Approach is to calculate discounted cash flows and net present value of expected royalties in the future to obtain a value of the royalty asset.
The market approach requires us to seek similar assets that have sold on the markets and adjust based on different variables that may impact this asset’s performance in the future.
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CHAPTER 05 Conducting Due Diligence
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The adjustment process explained in the previous chapter applies to more than just the market approach. This process of due diligence and altering of future expectations is vital to understanding the true value of intellectual property and future cash flow.
A lack of due diligence can leave you stuck in an asset where you may never break even nor get your desired return for a long period of time. So it is important that when you invest in these assets, you obtain a fair price and develop a clear and accurate valuation of the investment.
No one right way exists to conduct due diligence. But this chapter provides five key steps and the necessary resources to engage in a lengthy investigation into the potential of an asset under consideration.
#1 The Defining Characteristics of the Royalty Stream
● Understand Types of Royalties
When purchasing royalties we want to know the specific types. Are they mechanical, public performance, synchronization or print rights? Are they Master Recording rights or rights granted to songwriters?
● Full or Partial Rights
Can you buy all or portions of a royalty stream to one individual song? Or royalty streams of a portfolio that includes several songs or albums?
This variety creates different possibilities for your investment’s return.
● The Lifetime of the Copyright
Each royalty stream varies according to duration of the music copyright.
You want to determine the value of your return by how many years you can expect payment based on your ownership rights.
Some royalty streams can be short: Perhaps a five- to 10-year time frame.
● One Song or Many Songs
One individual song by itself or in a portfolio can generate significant royalty payments. The song may appear in a hit film. It could appear on a popular television show. It also may feature in the rotation of sports events or advertising campaigns.
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2. Gage the Song’s Popularity and the Musician’s Popularity
Technology allows investors see what is currently popular and trending. We can obtain a wealth of data through various online and digital platforms to determine the value of these assets over the long-term. These can help in our decision- making process.
First, we want to use accessible tools to determine the popularity of a song or asset. We can do that by exploring a number of different online platforms.
Determining the Song’s Popularity
Video Data: Many songs have accompanying music videos or that play regularly on video platforms accessible by users. Those considering a purchase of an asset should look to video-streaming sites like YouTube for more insight into how often these songs are played.
YouTube is typically the best source of information on music demand. The Google-owned video site is responsible for 40% of all music consumption in the United States. If you’re looking to quantify the historical popularity of this song, be sure to access as many pages as possible that feature this asset.
For example, each YouTube video features three critical pieces of data.
● First, is the View count. This tells you how many times that viewers have watched the video or listened to the song. ● ● Second is the upload date. This is important because the view count is based on how many times it has been seen since a user uploaded it. If one video has been watched the same number of times as another, but it was uploaded a year later, we can consider the first video to be more popular and in greater demand. ● ● Third are the metrics that tell us whether users actually like the song or video. There are two small icons, a Thumbs Up and a Thumbs Down below each video on YouTube. These are important because we can use these figures to determine a percentage of individuals who enjoy this song. In addition, a higher number of votes indicates an increased amount of user engagement.
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An Example of a Popular Song on YouTube
In the image above, we can see that a version of “Beast of Burden” by The Rolling Stones has generated a significant number of views. Uploaded originally in 2007, this song has generated more than 12.6 million views on this individual YouTube account alone.
Nearly 36,000 views like this song according to the Thumbs Up icon compared to just 980 people with an unfavorable view.
And this is just one YouTube channel featuring this song. Type in the keywords “Beast of Burden” and “Rolling Stones” into the YouTube search box, and you will find 104,000 results.
Streaming Data
Given the increasing popularity of streaming services, we can obtain information on the number of times that a song has been played on specific platforms. For example, individuals can access data on sites like Spotify Charts which provides daily insight into the number of streams a song receives.
Sales Data
Billboard charts display the rankings of any album or song comparable to its genre.
Nielsen ratings can show the possible royalty stream from music used in current popular television shows.
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Determining the Musician’s Popularity
Receive Regular News Updates
Google News is an excellent source of updated information on any asset class, musician, or genre. Investors considering the purchase of a specific music asset should establish an RSS feed that ensures regular updates on that song or musician are sent directly to their email in real-time. More information about that process can be found, right here.
Scan Social Media Platforms
Social media platforms offer insight into the broad and general metrics of how many fans want to belong and interact within the pages of musical groups and performers.
Musicians typically have both personal and fan pages. Investors should be interested in the number of fans that follow the musician. Fan pages can be accessed through the basic search tools available on Facebook.
The micro-blogging site has created a communications balance that allows anyone access to anyone else through 140-character messages. Users of Twitter engage with Followers – other individuals who subscribe to a message feed or each other. Twitter profiles provide a breakdown of the number of followers that a musician or songwriter has. This is important for two reasons. First, it provides a deeper understanding of how many fans are engaged in the work and actions of a musician. Second, a large audience is important for marketing purposes of their music, works, and tour.
In addition, anyone engaged in a diligence process can use the search function on Twitter to see if people are talking about a specific musician or song.
Photo Sharing Sites
Photo-sharing sites allow investors to see how many of those followers share pictures and videos in their social community. These include Instagram, Pinterest, and Flickr. Like other social media platforms, these sites offer statistics into the number of followers and posts of an active musician or songwriter.
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Music Blogs
Be sure to scan the wealth of music blogs available that provide up-to-date information on a musician or band. Breaking news emerges regularly in this industry, and includes updates and insight into the popularity of specific genres and songs.
Digital Music News rank the following blogs as the Top 20 online today.
1. Pitchfork 2. Consequence of Sound 3. Tiny Mix Tapes 4. Resident Advisor 5. Stereogum 6. The Line of Best Fit 7. Your EDM 8. Pop Justice 9. Dancing Astronaut 10. Drowned in Sound 11. Fake Shore Drive 12. All Hiphop 13. EDM Sauce 14. Large Hearted Boy 15. Rap Radar 16. 2 Dope Boyz 17. FACT 18. Hypetrak 19. Indie Shuffle 20. The Wild Honey Pie
Investors should search on Google, Bing, or other search engines for additional blogs that cater to the specific genre of the music asset.
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3. Determine the Trend of Royalty Income
As an investor you want to know how much money a royalty stream has generated in the past. While past performance doesn’t guarantee future returns, it is our best source of data to make forward-looking estimates.
Investors can measure performance based on one year or several years of past royalty payments generated by the asset.This can offer a strong historical average and baseline for projections.
The other key number is the quarterly royalty payments over the last year. The last 12 months’ total returns tell us whether a royalty stream is trending up over previous years.
We also want to inspect the four individual quarters. This can help us identify key trends affecting the song. These include:
● Seasonality
● Income tied to touring schedules
● Timing of foreign royalty payments
● Release in a television show or advertisement
● Currency fluctuations
● Other metrics that might go unnoticed without proper evaluation
The last three years tells us if royalty stream payouts are increasing, decreasing, or flat. We can see in a graph if short-term spikes exist.
4. Determine if Your Data Set is Complete
The underlying determination of a song or royalty stream’s true value lies in its usage data.
There’s just one challenge. The usage data – collected by groups like SoundExchange, ASCAP, and BMI – is not usually released for public consumption.
When little transparency exists, it’s harder for buyers to determine a royalty’s value. Imagine being told that you can buy Apple stock at $100 per share, but you have no past knowledge of its iPhone sales or its projected sales into the future.
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How would you know if you’re getting a fair value? The seller of intellectual property has access to a data set on the performance and royalties associated with the asset. This offers investors a chance to assess past usage on all media sources that have played a song. Investors can see how much the song has generated in in royalty payments depending on the PRO or other collections organization.
By using this method, we are able to calculate the net present value and three important measurements for the associated royalty asset. We can project future royalty payment streams, its payback period and lifecycle, and risks associated with future expectations for this asset.
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Part Four: How Royalty Exchange Changed an Illiquid Market CHAPTER 06 Why Artists Sell Royalties
The Ultimate Guide to Buying Music Royalties 43 Part Four – How Royalty Exchange Changed an Illiquid Market
Why would musicians and other intellectual property holders want to sell their royalty streams? Musicians may need capital for any of the following reasons:
● Fund a new album, tour, or other project
● Retirement income
● Buy a house or vehicle
● Family emergency
● Support a side project or charitable cause
● Diversify away from music as their sole source of income
● Make investments of their own
● Pay off debt
The reasons can be professional, personal, or both. One of the most important things to help them accomplish their goals is the establishment of a more liquid market for royalties.
Selling Illiquid Assets
Given that music royalties are illiquid assets, it’s hard to sell them quickly. Also, the lack of a formal marketplace limited the number of reliable options to sell intellectual property.
The lack of a real market limited the number of potential buyers for these assets. Also, a lack of potential buyers made it difficult to establish a fair market price. Some artists have said that they didn’t know if they had received a fair offer for these assets.
That includes artist Bruce BecVar. BecVar had long relied on royalties as his primary source of his income. He wanted to diversify his assets and had an opportunity to invest in the futures markets. First, he needed access to capital to make a successful investment.
BecVar says he had limited options before the marketplace created by Royalty Exchange.
One option was through the BMI loan program. The other was to explore a deal with a private buyer. In the past, he had a bad experience with a private buyer, who undervalued his assets by a wide margin.
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“Luckily, I read the agreement,” he said. “It would have been a disaster. He was taking me to the cleaners.”
Using Royalty Exchange, he secured a sale of his assets at a 7x multiple.
In the past, artists have also relied on label advances to secure capital for future projects.
Given that labels could recoup these advances against future earnings, artists faced greater financial instability and questions about how and when they could access additional capital.
Finally, it’s important to remember that some royalty streams are not vast annual payments. They might pay less than $10,000 per year, a small amount of money for someone to live on.
Selling royalty streams allows an intellectual property holder to receive an up- front lump sum based on the present value of future royalty streams.
An End to “All or Nothing.”
One of the unique benefits Royalty Exchange offers is that we allow musicians or rights holders to divest only a small share of their royalties. In the past, their options were far more limited.
For most musicians and songwriters, third parties want to buy their entire portfolio. To get money, they had to make a decision to sell everything or sell nothing. Not every intellectual property holder seeks to sell the full rights to a song or their entire portfolio.
That’s the case of songwriter James Thomas. When a family emergency hit Thomas, he scrambled to find a way to raise money. Thomas’ family in Detroit needed to move across the city. A songwriter of the Kanye West platinum hit “Mercy,” Thomas explored his options. An administrative company made an offer for the royalty stream to this song.
But there was an unfortunate catch. They also wanted his entire portfolio of songs in the deal. This was an “All or Nothing” offer.
Thomas found Royalty Exchange online after searching Google. Within weeks, he was able to secure a deal for the rights to this song alone.
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He was able to keep the royalty rights to his other songs as well. He will still generate money from his previous work. Now, his family has been able to move, and he has extra money. Thomas plans to finish sound engineering school and launch a few projects on iTunes.
Selling Portions of Royalty Streams
Royalty Exchange allows artists to sell a percentage of the royalty streams from one song or a collection of songs.
This partial sale means that the musician doesn’t have to sell the entire asset stream or the copyrights if they need money to fund future projects. They can sell 10%, 25%, 50% or any other percentage of future royalties.
Alicia Angel is a songwriter for the popular animated show Dora the Explorer. Angel needed money to fund a music video and to raise awareness for a social cause in Africa.
However, the nature of her payment agreement meant that Angel would have to wait for her royalty payments to arrive. When Angel writes a song, it doesn’t appear on television for quite some time. In some cases, songs don’t appear for more than a year on television or in sing-along toys.
Angel analyzed the value of time and money and decided that she would sell a part of her future royalty income for a lump sum today. In exchange for that one- time payment, the investor now owns the rights to 33% of all future revenue from her songs.
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Chapter 6: Key Takeaways
● Musicians, songwriters, and artists sell intellectual property rights and royalty streams for a variety of personal and professional reasons.
● In the past, musicians had limited options to sell their royalty streams and difficulty obtaining a fair market price for these assets.
● Royalty Exchange has provided customized deals that allow intellectual property holders to sell portions of their royalty streams in return for a lump-sum payment.
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CHAPTER 07 Recent Auctions on Royalty Exchange
The Ultimate Guide to Buying Music Royalties 48 Part Four – How Royalty Exchange Changed an Illiquid Market
Each week at Royalty Exchange, intellectual property holders bring their assets to the open market. Royalty Exchange recently helped sell some terrific intellectual property assets tied to some iconic and chart-topping songs.
Here are a few top examples of recent successful auctions.
Arnakata Music Catalog Paid $16,000 Each Year
An investor was able to tap into a catalog that featured royalty streams from the Eurythmics, the Bee Gees, Judas Priest, The Tourists, the Flamin Groovies.
This auction included Mechanical, Performance, and Digital royalties.
Over the last four years, this catalog paid out, on average, more than $16,000 annually and had been paying out consistently for 17 years. The track record of consistent income makes this catalog particularly interesting to investors looking for income opportunities.
This Catalog featured five songs that generated 80% of the annual revenue.
“Love is a Stranger” – The Eurythmics: Originally released in the United States in 1983, this was the second U.S. single from the band’s breakout album, “Sweet Dreams (Are Made of This).” It would go on to peak at No. 6 in the United Kingdom and No. 23 in the States. It would eventually chart in more than a dozen countries worldwide. The band re-released the single as part of their greatest hits album in 1991.
“Beyond the Realms of Death” – Judas Priest: Released in 1978 off the heavy metal giant’s “Stained Class,” the nearly seven-minute song is widely considered one of the album’s highlights. The song would go on to be featured on at least half a dozen other Judas Priest albums
“Just Want to be Myself” – The Drones: At the vanguard of the British punk movement, The Drones featured this song on their debut album in 1977. It was re- issued in 1993.
“So Good to be Back Home” – The Tourists: This song broke into the top 10 in the United Kingdom for this British rock band in 1980. This short-lived group featured both Annie Lennox and Dave Stewart, who would go to international superstardom later in the 1980s as The Eurythmics.
“Songbird” – The Bee Gees: This country-infused ballad appeared on the band’s 13th studio album in 1975, which was also the group’s last before diving head first into the dish movement.
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Overall, this catalog features more than 330 songs spanning decades and genres, churning out steady royalty payouts twice annually for almost 20 years.
Smash Country Hit – “What We Ain’t Got”
Artist Jake Owen recorded the song “What We Ain’t Got” in 2013 with the help of writer Travis Jerome Goff. It was one of the most popular songs on Owen’s fourth studio album “Days of Gold,” which received a five-star review from Got Country Online.
The ballad is about the singer’s desire to get back a person whom he loves but has left him. Owen had said that he thought releasing the song was a risk.
The musician is best known for his popular, up-tempo songs about partying. Music critic Markos Papadatos of Digital Journal rated the song 4.5 out of 5 stars. Papadatos praised the lyrics and Owen’s “rich yet haunting baritone vocals.” The song was part of a heavy rotation on the radio.
“What We Ain’t Got” started on the Billboard Hot 100 at No. 95 in January 2015. Since then, fans have watched the song 6.5 million times on YouTube.
The songwriter share generated $9,734 from sources over the last 12 months not tied to terrestrial radio. The $50,500 sale for these songwriter rights was five times more than the annual income stream.
Royalty Payments from Music Used in Over 400 Television Shows
It’s not just popular songs and classic albums that can help investors generate a lot of money. Production music is a vital part of the television industry. But television watchers sometimes overlook background production music.
The songs heard in the background, during scene transitions, and in opening and closing credits offer royalty payments to the owners of the intellectual property. One of the most lucrative deals of 2016 came with the sale of the rights to music from 400 different television shows.
These songwriter performance royalties are tied to songs from shows like “Botched,” “E News Daily” and “Keeping Up with the Kardashians,” and on networks like NBC, VH1, National Geographic, HBO, CNN, Bravo, and more.
The Ultimate Guide to Buying Music Royalties 50 Part Four – How Royalty Exchange Changed an Illiquid Market
This form of copyright can generate solid income for the owner of the intellectual property. In 2015 alone, the catalog generated $25,631.87.
Also, the auction winner partnered with industry veterans to boost awareness of the music and to boost licensing for the catalog. These experts will market the catalog in the future to other shows and potential outlets.
The Ultimate Guide to Buying Music Royalties 51 Part Four – How Royalty Exchange Changed an Illiquid Market
Chapter 7: Key Takeaways
● Each week, Royalty Exchange hosts a number of auctions that have different attributes, risks, and investment potential.
● Auctions include performance, mechanical, production, and digital royalties, among others.
The Ultimate Guide to Buying Music Royalties 52 Part Four – How Royalty Exchange Changed an Illiquid Market
CHAPTER 08 Why Buy Royalties on Royalty Exchange?
The Ultimate Guide to Buying Music Royalties 53 Part Four – How Royalty Exchange Changed an Illiquid Market
Buying and selling music royalties is now easier than ever. Royalty Exchange has changed the way that investors and intellectual property holders come together to exchange music royalties.
For decades, the bulk of transactions took places between “in the know” established music industry professionals. These back-office deals made it very difficult for the rights holder to obtain a fair market value of their assets.
In many cases, the buyer has been able to purchase assets far below market value. But a public market brings many buyers to the sale.
This creates an environment where investors can determine the true value of the assets. Auctions ensure that the market values the asset – with different participants setting the price based on their own expectations for the asset’s performance and their own risk tolerance.
Royalty Exchange also ensures that everyone can participate.
There was a recent change to Tennessee law that allowed Nashville Royalty to sell stakes in their music catalog, but investors have to be residents of the state. It is an attractive crowdfunding investment given that the portfolio includes hit songs by Conway Twitty, Reba McEntire, George Strait and Martina McBride. Nashville Royalty’s founder Jeff Tweel has said that investors can expect an annual yield from 12% to 15%.
However, Royalty Exchange is both a primary and secondary market, depending on the who the interested parties are and their “network” within the music industry at large. This is open to investors all around the world.
The Royalty Exchange platform opens up the “back-room” nature of these deals to investors who wouldn’t otherwise be privy to their availability, including both non-music industry and music industry professionals.
The key difference: Royalty Exchange hosts single unit auctions between one seller and many potential buyers.
A single-unit auction is an auction where only one investment asset is made available. This starts when the seller sets a reserve price. This is a minimum selling price that is the lowest amount that the seller is willing to accept for an item.
If no bids meet reserve price when an auction ends, the seller is not required to sell the item. If there is a reserve price for an auction it will be noted on the listing.
The Ultimate Guide to Buying Music Royalties 54 Part Four – How Royalty Exchange Changed an Illiquid Market
Buyers can place bids only for the whole asset in its entirety, and there can be only one auction winner. Winning bids are binding legal contracts with the seller of the royalty stream. That means that if you win the asset, the seller must transfer you the asset. There is no second guessing. The asset is yours as the winner.
How to Get Started
You can begin by scanning the list of available auctions, right here.
The first step to participating in our auctions is to fill out our registration forms available at https://auctions.royaltyexchange.com/accounts/signup/
You may individually register for each auction. Once registered for an auction, you can place a bid simply by entering the amount a bid amount and clicking “Bid Now.”
Our unique auction widget will keep track of all bids in real time and notify you of other investors’ bids on the auction.
All bids are binding and must be placed before an auction closes.
If you wish to place a bid through a medium other than the website, please contact us at [email protected] to discuss alternatives.
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